Aug. 5 (Bloomberg) -- The U.S. Securities and Exchange
Commission’s courtroom victory over ex-Goldman Sachs Group Inc.
employee Fabrice Tourre is helping the agency turn the page on
years of criticism that it isn’t holding Wall Street to account.

The win adds weight to pledges by SEC Chairman Mary Jo
White to reinvigorate the regulator, seeking more onerous
settlements in some cases and, if necessary, taking them to
trial. It also could bolster support for a 27 percent budget
increase for the agency that Congress is considering.

“To take on cases that are low-hanging fruit and pound its
chest in front of Congress is not the same as winning a high-profile trial,” said Jacob Frenkel, a former SEC lawyer and now
partner at Shulman Rogers Gandal Pordy & Ecker PA in Potomac,
Maryland. “It’s a tremendous shot in the arm for an agency that
has come under criticism for its enforcement program.”

The SEC has struggled to repair its image after a decade of
debacles that began with accounting fraud at Enron Corp. and
ended with an unprecedented taxpayer bailout of Wall Street amid
a credit crisis. The intervening years included analyst and
mutual-fund scandals unearthed by New York’s attorney general,
and Bernard Madoff’s multibillion-dollar ponzi scheme, which the
SEC missed despite repeated warnings.

Judges and lawmakers criticized the regulator’s policing of
Wall Street after 2008’s market meltdown, saying investigators
reached expedient settlements with firms that hurt shareholders
and didn’t hold senior executives accountable for wrongdoing.
The agency never brought claims tied to the collapse of Lehman
Brothers Holdings Inc. or the events that led to the bailout of
American International Group Inc.

‘Be Prepared’

While the trial could be a bellwether for a more aggressive
SEC, the agency is still struggling to build a stronger bench of
litigators to strengthen its hand in settlement negotiations.
White, who became the regulator’s chairman in April, told
lawmakers last week that she’s seeking additional resources to
hire trial attorneys.

“We can’t judge at this point how many additional trials
we’re going to have, but we already don’t have enough,” White
said in a July 30 hearing before the Senate Banking Committee.
“We have to be prepared to go to trial.”

The case against Tourre, 34, stemmed from one of the SEC’s
highest-profile fights related to the crisis. In 2010, the
agency sued New York-based Goldman Sachs, alleging it misled
investors in a 2007 deal known as Abacus about the role played
by John Paulson’s hedge fund, Paulson & Co. The SEC claimed
Tourre, then a Goldman Sachs vice president, hid that Paulson
helped choose the portfolio of subprime mortgage-backed
securities underlying Abacus while betting it would fail.

Lost Fights

Goldman Sachs agreed to pay a record $550 million to
resolve the case three months later, setting the stage for
claims against JPMorgan Chase & Co., Citigroup Inc., Mizuho
Financial Group Inc. and Wells Fargo & Co. over investment
products tied to mortgages.

As the SEC lost fights against people involved in
Citigroup and JPMorgan deals, the contest against Tourre became
a referendum on the agency’s settlement with Goldman Sachs and
its work on financial-crisis cases.

“The SEC needed at least one scalp from the financial
crisis, or they were going to face a lot of heat from
Congress,” said Adam Pritchard, a University of Michigan law
professor who previously worked as a lawyer for the regulator.

The trial required the SEC to teach jurors how to parse
disclosures on synthetic collateralized debt obligations. As
jargon-filled testimony rolled on, pundits including Joe Nocera,
an op-ed columnist for the New York Times, predicted the
government’s defeat. Tourre’s lawyers, funded by Goldman Sachs,
didn’t call anyone to the stand, relying instead on SEC
witnesses including Tourre to mount their defense.

Eating Crow

The jury found him liable Aug. 1 on six of seven of the
SEC’s claims.

“I need to eat some crow,” Nocera said Aug. 2 on radio
station WNYC. “After the government’s rocky start in the trial,
I said ‘Oh, this thing’s a slam dunk for Fabrice, he’s going to
be off the hook.’ And I was dead wrong.”

Andrew Ceresney, co-chief of the SEC’s enforcement
division, said the agency was “gratified” by the verdict and
that it will bring others to trial whenever needed.

“The verdict against Tourre validates the Goldman
settlement,” Pritchard said. “It was questioned at the time,
and now the jury has said that there was something there.”

The SEC’s victory isn’t enough to overshadow the agency’s
other shortcomings, said Dennis Kelleher, president of nonprofit
Better Markets.

‘Chasing Minnows’

“While this individual may be liable, may have broken the
law and may have gotten what he deserved, this one case should
fool no one: the SEC has an embarrassing record of non-enforcement on Wall Street,” Kelleher said in a statement
following the verdict. “No one should be allowed to break the
law, but the SEC must stop chasing minnows while letting the
whales of Wall Street go free.”

Tourre claimed that ACA Management LLC, which was selecting
the Abacus securities, knew about the role of Paulson’s fund in
the transaction. Tourre faces penalties that will be determined
later, including fines and a possible bar from the securities
industry.

In recent years, the SEC has sought to bolster its
courtroom gravitas through recruitment. Robert Khuzami, a former
prosecutor of terrorists and white-collar criminals, was
appointed the agency’s enforcement chief a month after President
Barack Obama took office in 2009. White, the former U.S.
attorney for the Southern District of New York from 1993 to
2002, won the convictions of four followers of Osama bin Laden
for the bombings of two U.S. embassies in Africa.

“You don’t want to mess with Mary Jo,” Obama said in
January as he introduced her at the White House.

Canellos, Ceresney

Keeping a full staff may be a challenge. Matthew Martens,
the SEC’s lead lawyer in the Tourre trial, is planning to leave
the agency, according to a person with direct knowledge of the
matter, requesting anonymity because the information isn’t
public. Khuzami, 57, departed earlier this year and was replaced
by Ceresney and George Canellos, 48, who both had worked for
White as federal prosecutors in Manhattan.

White, 65, still has work to do to convince defense
attorneys that they will face a formidable opponent if they go
to trial, according to Frenkel.

“There’s nothing about this verdict that would cause me as
a trial lawyer to be any less willing or desirous of trying a
case against the SEC,” Frenkel said.

The case is SEC v. Tourre, 10-cv-03229, U.S. District
Court, Southern District of New York (Manhattan).